Does Bigger Volume Mean Bigger Profits?

Harriet is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Are stocks that light up the exchanges with huge sales volumes automatically a good buy simply because millions of investors, possibly including some smart money folks, are chasing them? Well, there are no easy answers to this question. The response depends upon the specifics of each particular situation. But at least in the case of three stocks with exceptionally high volume - Blackberry (NASDAQ: BBRY), Facebook (NASDAQ: FB) and Zynga (NASDAQ: ZNGA) - bigger does not necessarily mean better.

Facebook remains a puzzle

Facebook is designed to connect people; untold millions share pictures and other information through its network. In many ways, though, it has not managed to connect investors to the profits they had hoped to earn. And that is the case despite the fact that its moving average trade volume for a recent 100-day period was a stratospheric 48,395,824 shares.

Its fundamentals are hardly stellar by anybody’s reckoning. Most notably, its stock price history change for the last 52 weeks is -21.22%. And that figure goes a long way towards explaining why its trailing price-to-earnings ratio, which is calculated on the basis of past performance, is a “sky high” 537.28. Granted its forward price-to-earnings ratio, a figure that relies upon estimates of future earnings for 2014, is a much more reasonable 32.10. But who knows if that prediction will stand the test of time.

Two other fundamentals which are designed to measure how efficiently a company is run are also concerning, as they might point to some managerial lapses. Facebook’s profit margin is only 1.22% and its operating margin remains an unimpressive 9.66%.

Zynga: the caution lights are flashing

Zynga develops, markets, and operates online social games on social networking sites and mobile platforms in the United States and globally. This company ranks as one of the NASDAQ’s most active; its moving average trade volume for a recent 100-day period was 30,656,766 shares. But this high volume might not necessarily indicate that buyers are flocking to it in exceptionally large numbers. Rather, it might be reflective of Zynga’s low sales price, which ranged from a low of $2.09 to a high of $6.36 during the past 52 weeks. Buying at low valuations means you can purchase more shares.

There's also one other flashing yellow light that might actually be red depending upon your perspective: Zynga’s year-to-year revenue growth for the first quarter of 2013 is -17.90%, and its diluted earnings per share for that same period was -0.16%. This latter figure points to other disappointments, as Zynga’s return on equity was calculated at -6.59%

Blackberry: a slump that might be more than a bump

Blackberry manufactures and markets strategies for accessing e-mails and other correspondences. As of this writing, at least, investors might be more pleased with having its platform integrated into their mobile devices than they would be carrying its stock around in their portfolio.

Its moving average sales volume over a 100-day period was 51,047,078 shares, so it is obviously attracting considerable interest. But it does not appear to be justifying buyers’ confidence. Blackberry is not currently profitable, having a diluted earnings per share of -$1.23 per share for the first quarter of 2013.

To make matters worse, Blackberry’s income has fallen precipitously during the past year. Its net income for the period ending on March 1, 2013 was -$646,000,000, while just two years earlier it was $3,411,000 for a comparable period. And these days the market is not forgiving. Sell orders are placed at the first sign of weakness, and once a stock has dipped it is hard for it to regain its momentum, particularly if it is one without a strong track record and an impressive market share. It might be difficult to overlook these quarterly results as being simply a bump in the road to more impressive returns, an emerging company’s growing pains.

Foolish conclusion

The thought of following huge sales volume to gains that are equally as impressive has a certain appeal. But despite the fact that the practice might sound solid in principle, it is not necessarily a smart course to follow. At least in the case of three stocks - Blackberry, Facebook, and Zynga – impressive sales volumes have not always translated into financial returns that extend into bragging rights territory.

Fundamentals, such as the price-to-earnings ratio and enterprise value, might be a better indication of where your money is best allocated. Following this strategy might point you to gains which might not be titillating but might be well worth your consideration. And it is hard if not virtually impossible to find a stock that represents the perfect mix: a cutting edge product that elicits interest and offers pristine fundamentals. 

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Harriet Tramer Tramer has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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